Market Lab Report - Premarket Pulse 6/4/18

Quantitative easing (QE) continues at near record levels while all of the stocks on our Focus List made new all-time highs on Friday. Voodoo and Wyckoff undercut & rally formations continue to provide ample low risk entry points in this market.

Jobs data on Friday showed unemployment 3.8% while inflation remained around 2%. Over in the UK, such figures are almost as distorted as if everything is prosperous for all. Yet the wealth of the top 1% now represent the bottom 90% of wealth. A rising stock market and real estate market since 2009 has helped achieve this effect. But such extremes are recipes for deep social unrest.

Meanwhile, the bifurcation between the US Federal Reserve and the rest of the world's global central banks continues. The CME’s “Fed Watch” tool predicts a 76% chance of a rate increase when the US Federal Reserve meets in June, with at least one more rate hike by the end of the year. By contrast, global central banks show no sign of making meaningful changes to their monetary policies as the pace of money printing continues at near record levels.

The odds the European Central Bank will hike rates over the next 12 months stands at just 30%. This dislocation between the US Federal Reserve's tightening policies and the rest of the world's global central banks who are unable to tighten could keep the stock market in a chop zone as we have seen so far this year.

Then we have the instability of the EU which has been ongoing. First it was the UK via Brexit, and now possibly Italy. While the situation in Italy has been resolved for now, should Italy exit the EU in the future and issue its own, parallel currency, that would be enough to unravel the euro. While global central banks have claimed they would start to reduce the record levels of quantitative easing, none have done so by any meaningful amount. Singularly, the largest legal Ponzi scheme in the history of humanity cannot be tapered. Thus the Fed's ability to raise interest rates aggressively has been limited given a sovereign debt bubble of over $45 trillion and the fact that other central banks are not following the Fed's lead in increasing their own interest rates.

Many such as George Soros have said the EU's days are numbered. While Soros is talking his book, eurosceptic Marco Zanni said the eurozone project failed to deliver on its core promise to unify European citizens.
Asked if it was time Italy left the EU common monetary institution, he replied it was only a matter of time until the whole project would completely crumble around the continent. "I mean the euro is finished. It is unsustainable so it’s just a matter of time that the euro will break up because there isn’t any microeconomic and economic sense and rationale behind the euro."

Others have said similar over the last few years noting that euro economies continue to diverge amidst deepening inequalities between countries. It also does not help that the global economy remains stuck in neutral despite a decade of easy money which has catapulted the world into unprecedented levels of debt. John Hardy, head of FX strategy at Saxo Bank, said that the euro has been "already in the process" of disintegrating.

Given the recent political machinations in Italy, bond markets which act as bellwethers of geopolitical anxiety, deeply reacted as they feared the possibility of Italy ending up with an even more extreme populist government that would abandon the euro, leave the European Union, and default on Italy’s 2.3 trillion euros of sovereign debt.

Analysts say the chance of these events coming to pass are very small, but analysts fear that Italy would chip away at its commitment to the euro and the EU, demanding rule changes and concessions that would put stress on the system. So rather than a sudden break, such moves could eventually necessitate Italy exiting the EU which would probably break the camel's back.

So the market is faced with three major headwinds: 1) quantitative tightening by the US Federal Reserve, 2) the potential devaluation of fiat within next couple of years, and 3) the potential break up of the EU. This is countered by the near record levels of quantitative easing that continue to flow into US stocks. The tug-o-war continues.